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Is The Oil Rally Now Set To Continue?

This week’s key data from the oil and gas industry shows that outages in Nigeria and Canada, as well as a weakening dollar, have seen oil prices move past the $50 mark, causing the rig count to increase by 9, the largest jump since late last year.

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• A Union Pacific (NYSE: UNP) train carrying crude oil derailed in Oregon on June 3, the latest in a long line of derailments that have occurred in recent years.

• However, derailments have slowed since oil prices began falling in 2014, a decline that has corresponded with reduced shipments of oil on U.S. railways.

• The volume of oil moved by rail only accounts for about 10 percent of total U.S. oil production.

• The vast majority of crude-by-rail shipments originate in PADD 2, a region in the Midwest that encompasses the Bakken. Texas produces more oil than the Bakken, but as a relatively new oil-producing region, the Bakken has struggled to build adequate pipeline capacity.

Market Movers

• Hercules Offshore filed for Chapter 11 bankruptcy for the second time, six months after exiting its first bankruptcy process. The offshore oilfield service company has struggled with declining demand for its rigs and services.

• Devon Energy (NYSE: DVN) announced that it had secured agreements to sell $1 billion of assets in east Texas, the Anadarko Basin and some interests in the northern Midland Basin. “Combined with other recent asset sales, we have now announced $1.3 billion of gas-focused upstream divestitures. As we’ve said previously, proceeds from these tax-efficient transactions will be utilized to further strengthen our investment-grade financial position,” Dave Hager, president and CEO said in a statement. The proceeds are part of the company’s previously announced plan to sell off $2 to $3 billion in assets this year.

• Moody’s downgradedHalliburton (NYSE: HAL) and Baker Hughes (NYSE: BHI) from A2 to Baa1, reflecting a moderate credit risk. The downgrade comes a month after the two companies abandoned a merger amid antitrust scrutiny. High levels of debt and a weak business climate for oilfield services “have eroded Halliburton’s credit metrics to levels which no longer support its A2 credit rating,” Moody’s wrote.

Tuesday June 7, 2016

Oil prices surged on Monday on deeper supply outages from Nigeria. Brent moved above $50 per barrel and WTI closed in on that important threshold. With the uncertainty surrounding OPEC’s meeting now in the rear view mirror, oil could enter the next phase of its rebound. The EIA reported two weeks of oil inventory drawdowns last week and private sector estimates call for another decline this week, providing some strength for oil. Related: Saudi Authorities Panic As Speculators Drive Currency Down

Weaker dollar. The shockingly bad jobs report released by the U.S. Department of Labor last week put a slight dent in the prospects of a rate hike from the Fed. The dollar has weakened as a result, helping to push up crude oil prices.

Niger Delta Avengers strike again. Italian oil giant Eni (NYSE:E)lost 65,000 barrels per day last week due to another successful attack from the militant group in the Niger Delta. Nigeria’s oil production has declined by around 1 million barrels per day because of attacks from the Niger Delta Avengers.

Rig count up by 9. The oil rig count jumped by 9 last week, the sharpest increase since late last year. $50 oil has often been held up as a possible tipping point, a price high enough to induce more drilling. Parts of Texas and Oklahoma are already profitable at today’s prices. The Permian basin saw 5 oil rigs added back into operations last week. If oil stays at $50, drilling could slowly return, although the new wells drilled probably won’t be enough to stem the decline in overall U.S. oil production. Higher prices will likely be needed to spark higher output. Nevertheless, the rig count is likely at or close to a bottom, and the markets are nearing the point at which drilling could start to come back.

China stockpiling oil. China continues to snatch up oil cargoes to fill its strategic petroleum reserve, which is helping to push up tanker rates. Reuters says China will add 70 to 90 million barrels of oil to its SPR in 2016, adding some demand to global crude oil markets and also helping to keep tanker rates elevated. Tanker rates hit record highs late last year at over $110,000 per day and China’s recent oil purchases have kept tanker rates above $60,000 recently. Tanker congestion at several Asian ports, including Shanghai, is also putting upward pressure on day rates.

Commodities near bull market. Several years of a downturn are poised to end as a broad range of commodities are close to officially entering a bull market. The commodity super-cycle over the past decade led to overcapacity in a range of extractive resources, including coal, zinc, copper, oil, and more. But the bust has led to a shortfall in investment and tightening of supplies after a four-year bear market. The Bloomberg Commodity Index, which tracks 22 different commodities, is set to close 20 percent higher than it did on January 20, enough to warrant an official bull market designation. “The broad-based recovery in commodity markets this year has tipped several markets into bull market territory,” Mark Keenan, head of commodities research for Asia at Societe Generale SA in Singapore, told Bloomberg.

Shell dispels notion of “Baby Shell.” The CEO of Royal Dutch Shell (NYSE: RDS.A) reiterated this week that its plans for $30 billion in asset sales over the next three years is on track. Shell also plans on withdrawing from several countries as it seeks to shrink its footprint, cuts costs, and reduce debt after completing the merger with BG Group. In a statement on its website the company said that it had "earmarked up to 10 percent of Shell's oil and gas production, including 5 to 10 country exits, for disposal." Shell expected to "make significant progress on the first $6 billion-$8 billion of this program in 2016." The company also announced another round of spending cuts, bringing capex down to $29 billion for 2016, lower than a previous estimate of $33 billion. Savings from synergies with BG Group were revised up from $3.5 to $4.5 billion. Related: Why This Mega NatGas Project Might Not Go To The Oil Majors

At the same time, news reports that Shell had planned to spin off a bunch of its assets into a sort of “Baby Shell” are not founded, CEO Ben van Beurden said. "I think this was something created out of nowhere. I'm not ruling out anything in the longer run of course but it wouldn't do the trick for us. Having an IPO wouldn't really release the value of these assets in a way that helps you in your financial framework,” van Beurden said. The FT reports that Shell might have trouble meeting its asset disposal timeline if oil prices remain low. Low prices push down asset valuations, which could force Shell to delay disposals if it feels that it isn’t getting good value from sales.

Saudi Arabia approves National Transition Plan. The Saudi government approved the National Transition Plan on Monday, a key part of the country’s “Vision 2030.” The plan calls for tripling non-oil revenue by the end of the decade, cutting handouts, and developing non-oil industries like mining, tourism, and education. Saudi Arabia has a goal of creating 450,000 private sector jobs, a tall task in a country where the government is the main employer. Still, the plan is a historic shift, and could go a long way to reducing the country’s dependence on oil sales.

India driving oil markets. India’s oil demand grew by 400,000 barrels per day in the first quarter, exceeding China’s 353,000 barrels per day, according to the IEA. India has surpassed China as the fastest growth market for oil – crude oil demand is up 10 percent from a year earlier and gasoline demand is up 14.5 percent for the 12-month period ending in March.

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